By Omoh Gabriel, Business Editor
LAGOS — The Central Bank Monetary Policy Committee yesterday raised alarm over the Federal Government penchant for borrowing, stating that it may crowd out or deny the private sector access to credit to oil the wheel of economic prosperity in the country.

Rising from its two-day meeting, the committee said its key concerns were: “The elevated inflation levels; rising government expenditure and borrowings with the possible crowding out effects on the private sector; and demand pressure in the foreign exchange market, leading to reduction in external reserves.”

According to the committee, “available data showed that in October 2010, aggregate domestic credit (net) grew by 19.69 per cent over the December 2009 level, and by 23.63 per cent when annualized. Credit to government (net), which grew substantially by 53.35 per cent over end_December 2009 (or 64.02 per cent on annualized basis), was the major source of expansion in aggregate credit.

“Credit to the private sector grew marginally by 3.22 per cent (or 3.86 per cent on an annualized basis). In general, the growth in monetary and credit aggregates remained below the long term trends.”

“The interest rates at the interbank segment of the money market responded to the increase in the Monetary Policy Rate (MPR) effected at the last meeting of the MPC in September in line with policy expectation. Consequently, in October 2010, the average inter_bank call and open_buy_back (OBB) rates rose significantly to 8.45 and 7.53 per cent, respectively, representing increases of 526 and 461 basis points from the 3.19 and 2.92 per cent recorded in the preceding month.

Developments in market interest rates indicated that the retail lending rates were still relatively high.

The average maximum lending rate moderated slightly to 21.85 per cent in October from 22.20 per cent in September while the average prime lending rate stabilized at 16.66 per cent.

“The weighted average savings deposit rate remained relatively stable while the consolidated deposit rates increased to 2.31 per cent in October from 2.07 per cent in September.

Thus, the spread between the maximum lending rate and the consolidated deposit rate narrowed marginally to 19.54 per cent in October from 20.14 per cent in September.

It said “The view of the Committee is that the solution requires both fiscal and monetary measures, and reiterated the need to eliminate unnecessary subsidies that add to government expenditure and debt.

There is need also for continuing reforms in the economy particularly in the energy and agricultural sectors to curb high import bills through appropriate fiscal policies. The Committee remains conscious of its core mandate and reaffirms its commitment to price stability to engender sustainable economic growth.

“The Committee continued to urge greater fiscal responsibility and commitment to reforms that will enhance the effectiveness of monetary policy. Overall, members agreed that there is need for tightening, but the discussions centered on the form and the timing of the tightening.

After due consideration of the pros and cons of various policy options,  the Committee agreed on a majority decision to retain the current policy rate, given the need to retain flexibility and allow the effect of the previous rate increase to work through the system, against the argument for immediate increase in view of the elevated inflation risk.

The MPC’s decisions were therefore: To Retain the Monetary policy Rate (MPR) at 6.25 per cent.

To adjust the corridor to +/_ 200 basis points, implying Standing Lending Facility (SLF) rate of 8.25 per cent, and Standing Deposit Facility (SDF) rate of 4.25 per cent.
Maintain the policy stance of a stable exchange rate.

Continue to monitor inflationary trends with a view to taking appropriate steps as and when necessary. On the stance of monetary policy in the year ahead, the Committee reaffirmed that monetary policy would seek to exert pressure on aggregate demand, thereby helping to lower inflation expectations.

It noted “The foreign exchange market remained relatively stable. The total foreign exchange inflow in October was US$2.38 billion, representing a decrease of US$0.32 billion or 11.85 per cent below the US$2.70 billion recorded in the preceding month.

Total outflows or payments in October amounted to US$3.46 billion, a decrease of US$1.62 billion or 31.89 per cent compared with US$5.08 billion recorded in the preceding month. Consequently, the net outflow during this period was US$1.09 billion.

“Inflows from autonomous sources in October were US$10.43 billion compared with US$7.55 billion in September.  Cumulatively from January_October 2010, total foreign exchange inflows to the market amounted to US$ 88.32 billion comprising funds from the CBN (US$21.15 billion) and from autonomous sources such as oil companies, international institutions and home remittances (US$67.17 billion).

The Committee noted with satisfaction the complementary role of autonomous inflows in moderating demand pressure in the foreign exchange market.

“In October, the WDAS average closing rate was N151.25/US$ compared with N151.07/US$ recorded in September, representing a depreciation of 18 Kobo (0.12 per cent).

On November 15, 2010, the WDAS exchange rate was N150.29/US$ compared with N151.25/US$ for October, representing an appreciation of 96 kobo (0.64 per cent)

“At the interbank segment, the average buying and selling rates for October, were N151.68/US$ and N151.78/US$, compared with N152.51/US$ and N152.61/US$ respectively recorded in September, representing an appreciation of 83 kobo (or 0.54 percent).

On November 15, 2010 the corresponding rates were N150.65/US$ and N150.75/US$ as against N151.68/US$ and N151.78/US$, in October, registering an appreciation of 103 kobo (or 0.68 per cent)

“At the BDC segment, the average buying and selling rates in October were N151.98/US$ and N153.98/US$ respectively, compared with N152.30/US$ and N153.80/US$ in September.

The buying rate represented an appreciation of 32 kobo (0.21per cent) while selling rate represented a depreciation of 18 kobo (or 0.12 percent).  The buying and selling rates on November 15 were N151.50/ US $ and N153.50/ US$ compared with N151.98/US$ and N153.98/US$ for October, represented an appreciation of 48 kobo (or 0.31 per cent).

Thus, the stability of the naira exchange rate since the first half of 2009 continued into 2010.  The MPC believes that the relative stability in the foreign exchange market is likely to be sustained in the near term.  The Committee would continue to monitor developments in the market to ensure that measures are taken to eliminate speculative demand and exchange rate volatility.

“The gross external reserves stood at US$34.27 billion on 15th November, 2010 compared with US$33.597 billion as at end_October and US$34.59 billion as at end_September.

The committee noted the elevated demand for foreign exchange at the WDAS which led to an increase in reserve utilization to defend the currency. It also noted recent moderation of demand pressure following Central Bank’s interventions to curtail speculative demand.

It, however, stressed that the solution to reserve accretion have to be in implementation of appropriate reforms to industrial and trade policy aimed at reducing import-dependence, and these are beyond the scope of monetary policy” it stated.